The Merchant Cash Advance: When To Use It, When to Avoid It

A Merchant Cash Advance (“MCA”), also known as a “marketplace loan” or “on-line loan” is a short-term loan made to a small business based on the lender’s estimation of the borrower’s daily, weekly, or monthly ability to repay. Repayment of an MCA loan takes the form of a daily, weekly, or monthly debit to the borrower’s bank account by the lender. Due to stricter bank underwriting practices and the red tape often involved with obtaining loans from banks, the Merchant Cash Advance industry has become popular among small businesses, as a faster alternative to bank loans. However, this solution is not for every business and every funding need. In this article, we explain MCA loans, including their drawbacks and things you need to consider before signing on the dotted line.

An advantage of a MCA is the quick, usually on-line application process. It’s quick, generally very easy, and funding decisions are made quickly with a high degree of automation. Another advantage of MCA loans is the liberal underwriting. Businesses may obtain advances even if the owner has a low credit score.

When to Avoid a Merchant Cash Advance

While many business owners are seduced by the quick approval and funding, and that is a very compelling feature of marketplace loans, there is a dark side. Sales persons and brokers can be very aggressive and pushy. Since this product is sold through a network of highly compensated unregulated brokers, there is little uniformity in the quality or accuracy of the information they will provide you in order to get you to sign on the bottom line.

Often, marketers and MCA lenders try to confuse borrowers by disguising and mischaracterizing the nature of the transaction, by calling it something other than what it is. Many will use terminology such as a “factoring agreement” instead of “loan agreement”, to confuse borrowers and to avoid running afoul of regulators that may limit the amount MCA lenders can charge in fees and interest. Make no mistake MCA loans have few, if any similarities to factoring—a much less costly and far more flexible financing alternative which has been used for hundreds of years by small business owners.

How to Decide Whether to Take a Merchant Cash Advance

To decide whether or not to take a Merchant Cash Advance, ask yourself these questions:

Is an MCA loan the best financing option for me?

Have I explored less costly alternatives such as factoring?

Is a Merchant Cash Advance the least costly financing option?

Do I really understand the costs of an MCA loan?

Can my business withstand the cash flow disruption that occurs when the MCA lender debits my bank account every week or every month?

Can I afford to pay penalties if I have inadequate funds in my account on the date the MCA lender attempts to take their periodic payment?

Can I afford renewal fees if I have to renew my loan?

Will I be able to pay my bills when due if an MCA lender is taking a percentage or fixed amount off the top of my sales?

Understanding the inflexibility of MCA loans is an important consideration before signing on the dotted line. When things don’t go according to plan, costs can sky rocket and your company’s survival could be at stake.

Do Your Homework

If you answered “yes” to all the questions above, then an MCA loan is one possible alternative for your business. Check the MCA lender’s online ratings, reviews, policies and fine print. Before signing on the dotted line, research MCA lenders and talk to other entrepreneurs who have borrowed from them. Look for hidden costs and avoid providers who are overly pushy.

If a Merchant Cash Advance Seems Too Risky or Costly for You…

If you think there is even a chance that you may not be able to repay your MCA loan on time every week, there are better alternatives, like invoice factoring, for many companies.

This funding solution works by providing a cash advance based on the value of invoices you submit to your customers for work you’ve already performed or for goods you’ve already delivered. Factoring is generally for business’ that sell goods or services to other businesses—like trucking companies, staffing companies, manufacturers, IT companies, freight brokers, and wholesale distributors. The factoring company gives you a certain percentage of the invoice value upfront, up to 98%. Then, you receive the remaining amount once your client pays the factoring company.

In other words, invoice factoring pays you immediately for receivables you may not otherwise be able to collect on for weeks or months. You’ll eliminate the hassle of collecting on customer accounts and, with the uninterrupted cash flow, you’ll be able to pay for current needs, and fund your company without borrowing or taking on debt. Unlike MCA loans, factoring also comes with a variety of other features such vetting your customers’ credit to help you avoid extending credit to customers who cannot pay you on time, and collection services.

The Bottom Line

A merchant cash advance or marketplace loan should be your last borrowing alternative. You have to generate the sales required to keep your business afloat while repaying your cash advance debt. It’s also important to remember that, with an MCA loan, the provider gets paid first. Then, you can start paying your own bills. On the other hand, with invoice factoring, you get paid first, and YOU decide when your bills, employees, suppliers, and lenders get paid.

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